Business World

Tuesday 23 September 2014

Italy forced to rescue bank in €4bn deal

Andrew Davis and Sonia Sirletti

Published 28/01/2013 | 05:00

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The Bank of Italy has approved €3.9bn in emergency loans for the world's oldest bank – Banca Monte dei Paschi di Siena – meaning Prime Minister Mario Monti may have to push ahead with the unpopular bailout before elections next month.

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The decision comes amid a political firestorm over rescuing the bank after revelations that the lender's former management hid details of structured-finance transactions that may produce hundreds of millions of euros in losses.

The Bank of Italy made its announcement a day after Monte Paschi shareholders approved €6.5bn in capital increases needed to secure the loans.

"The situation is under control," and the bank is prepared to take additional action if necessary, Monte Paschi chairman Alessandro Profumo said.

The revelations of the hidden losses came in the final weeks of campaigning for elections next month. Disgraced former prime minister Silvio Berlusconi has seized on the story to attack both Mr Monti and the front-runner, Democratic Party leader Pier Luigi Bersani. Mr Berlusconi has tried to link Mr Monti's unpopular property tax to the Paschi aid, while tarring Mr Bersani for his party's ties to the bank.

Under the bailout plan, Monte Paschi will sell securities dubbed 'Monti bonds' to the government with a 9pc coupon, or interest rate, that may rise to as much as 15pc. Monte Paschi is seeking state help to bolster its balance sheet after the bank failed to meet the capital requirements set by the European Banking Authority. The bank is selling assets and reducing risk and costs in a three-year plan to restore liquidity.

The bank plans to issue the bonds by the end of February, Mr Profumo said.

The bank also plans to put out a report on the extent of the losses caused by the transactions by mid-February.

The company said it plans to review its accounts after it emerged that the lender engaged in a derivative transaction with Deutsche Bank in 2008, dubbed 'Project Santorini', that obscured losses before it sought an initial government bailout the following year. The bank said last week that it's reviewing three money-losing structured deals, dubbed Santorini, Alexandria and Nota Italia, uncovered by newly appointed executives.

Prosecutors are investigating the actions of former management for possible criminal violation and the Bank of Italy said this month that executives withheld key aspects of the transactions from regulators.

The probe is focusing on Monte Paschi's 2007 agreement to buy Banca Antonveneta for €9bn. Banco Santander had valued the lender at €6.6bn two months earlier.

Irish Independent

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